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Exam 7: Bonds

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Question 51

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Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

A) Bond 8's current yield will increase each year.
B) Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
C) Bond 12 sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
D) Bond 8 sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
E) Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase.

F) A) and B)
G) C) and D)

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Question 52

Multiple Choice

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If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

A) A 1-year zero coupon bond.
B) A 1-year bond with an 8% coupon.
C) A 10-year bond with an 8% coupon.
D) A 10-year bond with a 12% coupon.
E) A 10-year zero coupon bond.

F) C) and E)
G) A) and B)

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Question 53

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Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Which of the following statements is CORRECT?

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

Taussig Corp.'s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds?

If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,120. What is the bond's nominal yield to call?

A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?